Discussion

Welcome address

In his welcome address Masaru Ishida, Director of the Enterprise and Cooperative Development Department, recalled the creation of the Poverty-oriented Banking Programme in 1991 within the new ILO department on private sector promotion, "ENTREPRISE". This Programme was to build bridges between ENT/MAN which looks after individual enterprises and COOP which is concerned with the promotion of associations and cooperatives.

Over the years work on this cross-cutting theme yielded a wealth of issues related to the financial sector and affecting enterprises and other ILO target populations: migrant worker remittances, bonded labour, micro-finance, social banking, revolving loan and guarantee funds, gender-specific control over financial resources etc. These issues had in common a concern for social equity and economic and financial efficiency: for example, economic agents should not be excluded from financial markets only because of scale, the size of their undertaking or gender. In the language of microfinance this meant that the ILO had to combine outreach to the poor (equity) with sustainability of the intermediary institution (efficiency).

This balance was not always easy to maintain. There were value judgements involved on what is more and what is less important; there were also group interests at stake and conflicts. To insist, for example, that microfinance programmes should reach full financial sustainability categorically within 5 years has implications for the loan portfolio, possibly to the detriment of poor people. This was a matter for policy choice, not just for Governments, banks, NGOs and social partner organisations, but also and primarily for the ILO itself. Often the ILO received requests from constituents for advice on how to define the criteria for eligibility for micro-loans from a Social Fund. Some solutions that the ILO may offer could diminish social pressure and be politically convenient in the short term, but were at the expense of the viability of the intermediary institutions. Other recipes favoured the soundness of the intermediary institution, possibly at the expense of social peace.

The objective of the workshop was therefore to distill the core principles of an ILO policy on finance. The workshop should yield a draft policy statement or position for consideration by the Office and discussion by the Governing Body.

Is there a social dimension to finance?

In the first keynote speech J.D. von Pischke recalled that finance was primarily social: after all, credit meant trust. Financial markets created value, but this entailed risk and to some extent this risk could be offset by confidence. Every transaction between people tested this confidence. The more competitive financial markets were, the more they contributed to society, through open market access and a wide range of services and products. Finance was in his view most socially useful when it was allowed to do what it can do best, i.e. efficient intermediation. Innovations added to these social benefits, for example, by lengthening the term structure of credit, reducing transaction costs for borrowers and lenders and refining the valuation processes that determine creditworthiness, loan size and credit terms and conditions. An illustration of such an innovation was the attempt to ensure that NGOs which are normally not allowed to take deposits would be able to do so provided the required regulatory framework is adjusted. Working against the financial market produced in his view little benefits; this applied to interest rate controls, credit rationing, blanket negligence of risk in financial contracts, and a too rapid propensity to intervene in cases of market failures. There was also a level of poverty and deprivation which would not allow the absorption of financial services and where direct transfers were more meaningful.

Von Pischke reported on a genuine innovation with tangible social benefits, called a "capital enhancement guarantee" system, proposed for Poland by an FAO mission. This type of guarantee simply provides additional capital to banks to encourage them to undertake deals they consider too risky or that would not otherwise meet the standards of regulators. Capital would be provided through a bidding process in auctions of donor-supplied guarantee funds. Banks' bids would be expressed as the proportion of additional capital, in relation to the size of the proposed loans(s) in question. Low bids would win, permitting banks to expand their risks at the margin. This type of guarantee is based on the assumption that bankers are better placed than third parties are to evaluate risk, and that a principal contribution that banks make to welfare is to price and manage risk. Auctioning capital directly to banks is a transparent way of offering guarantees. Bank regulators would ascertain through their routine examination of banks that the loans for which capital was provided were in fact undertaken. This guarantee mechanism avoids the costs of maintaining separate guarantee agencies, most of which do not contribute to the reduction of real risk, only its coverage. The auctioneer could be the Central Bank, Ministry of Finance, a foreign bank, an insurance company, a law office or the national lottery. Donor funds would disburse rapidly, providing capital that offers a permanent increase in lending capacity to banks that price risk correctly. The ILO should, according to Von Pischke, insist on sustainability of the intermediaries using ILO seed money. The ILO also had a role to play in dissemination of findings about what works in the small scale financial market. Most importantly, the ILO had a distinct responsibility as a social conscience agent in matters of international financial policy and programmes.

The ensuing discussion focussed on the social effects of globalizing financial markets which put international labour standards to the test, above all as regards collective bargaining and the freedom of association. In view of these linkages there was an obligation for an international agency like the ILO to assist constituents in making sure that policies addressed at the financial sector have minimum social costs.

Financial markets: Access issues

Creating microfinance institutions

The presentation by Peter Kooi dealt with ACLEDA (Association of Cambodian Local Economic Development Associations), the largest microfinance institution in Cambodia, with a loan portfolio of approx. $ 6 million and 35,000 active borrowers, most of them poor women (90%). The average active loan is $ 200. ACLEDA had a network of 23 branch offices and 220 professional staff. ACLEDA is a national NGO that received ILO technical assistance since 1993. The current ILO support is through the UNDP/ILO project "Alleviation of Poverty through ACLEDA's Financial Services".

After a period of declining budget deficits, ACLEDA is expected to break-even in 1997 and in 1998 even a modest surplus is expected. Impact studies showed that small business loans of approx. $ 500 created or sustained one job. 97% of the respondents indicate that their living conditions had improved and were now able to spend more on education, housing and food. They were also able to generate more savings. The studies also showed a steady decline in the interest rates of money lenders. According to half of the respondents this decline was due to ACLEDA's presence as a micro finance institution. 93% of the clients rated ACLEDA's services as very effective. 96% of the community leaders said to be impressed with the way ACLEDA operated. Reflecting its progress towards as sustainable microfinance institution ACLEDA is embarking on a transformation into a fully fledged bank, which will allow it to attract deposits from the general public.

The factors that contributed to ACLEDA's success were its emphasis on local capacity-building from the start, in terms of management, technical competence and organization and a policy to scale up to volumes of transactions, to adapt market oriented pricing policies, to design demand oriented services and to put constant emphasis on productivity improvements.

The lessons for the ILO were that microfinance can indeed make a substantial impact on the incomes and welfare of the most disadvantaged groups of a population, even in a country without any financial infrastructure. Access to sustainable financial services was key to poverty alleviation and job creation. The emphasis on institutional sustainability of the intermediary and outreach and impact on the poor was highly relevant in the ILO's context, with its mandate to achieve equity and efficiency objectives simultaneously. ILO should become more involved in activities to support self employment and employment in SMEs taking into account that credit was indeed often the key bottleneck. The objective for the ILO should be to develop models and success stories such as ACLEDA and PA-SMEC for replication world-wide. It is the ILO's responsibility and comparative advantage to examine the impact of microfinance on jobs, income and welfare.

Bridging banks and enterprises: Guarantee funds

The presentation by Peter van Rooij dealt with the contributions of guarantee fund mechanisms to poverty alleviation. ILO had a variety of experiences with guarantee funds, for example through the Assistance to Business Creation (ABC) project in Kenya and the inter-regional programme in support of NGO-managed Guarantee Schemes. In the latter project, US$ 400,000 were made available as guarantee capital, which enabled NGOs to access an amount of US$ 1.2 million in loans over a period of three years. As a result of this leverage, some target group borrowers claimed to have enjoyed an average income increase of some 10 percent. After almost four years of project implementation, out of the original guarantee of US$ 400,000 only 2,25 per cent were called by banks.

According to the independent evaluation of this ILO programme, "the needs of the informal sector are growing rapidly, whilst banks remain hesitant to include very small-scale producers among their regular clients. An intermediary solution is therefore required. The guarantee fund is a concrete response to such needs. This project adds a new element to what is generally applied, namely the self-management". The effectiveness of the guarantee instrument seemed to be due to several factors: familiarity of NGO staff with the functioning of a guarantee mechanism; prior relations with the local bank; planning capacity for the economic activities of members/clients; established financial performance control measures, and a capacity to keep track of the performance of the guarantee portfolio and of the expenditure and revenue related to it. The subsequent project phase would focus even more on capacity-building through a large-scale training programme involving professional training institutions in developing countries and in the North (Luxembourg and the Netherlands).

In the subsequent discussion it became clear that a successful guarantee fund presupposed that the guarantor disposed of better information about the borrower's risk profile than the bank. This condition was more likely to be met by member-based guarantors, like mutual guarantee associations. While the direct effect of bringing additional clients into the formal banking sector (additionality criterion) was generally impossible to prove, discussants pointed out the general positive impact of a guarantee fund on building up confidence in small-scale financial transactions and on financial innovations like collateral substitution.

Linking microfinance and government: Social funds - a model?

The third illustration of ILO efforts to improve market access was presented by Christian Zeininger of the Social Development Fund (SDF) at the Ministry of Labour in Zimbabwe. The purpose of this project was to put the SDF on a sound basis and transform it into a genuine apex mechanism for wholesale lending to financial NGOs which in turn onlend to eligible microentrepreneurs, primarily people who lost their jobs as a result of structural adjustment measures. The strategy of this project was to help financial intermediaries attain progressively higher levels of sustainability, i.e. cost coverage (capital depreciation and losses, administrative costs) after three years. The challenge of the project consisted in turning around an existing loan-disbursement machinery into a fully viable and sustainable set-up. To that end, the project had to build up a capacity to collect outstanding loans, and bring Government and the financial NGOs to agree on the interest spread. The lessons learnt in this exercise will be relevant and replicable to other African countries with similar social funds and similar pressures to relieve the unemployment problem in urban areas.

In the ensuing debate it was pointed out that the social dimension of structural adjustment programmes seem to come always as an afterthought and the ILO was not sufficiently involved in the design of these programmes. Another point of discussion was the question to what extent social funds could effectively satisfy the large number of unemployed interested in microfinance for self employment. The quality of outreach was yet another point in the debate: the actual income and welfare effects varied depending on the length of observation and the poverty levels at which these financial services were oriented.